Question 1

One of your colleagues has recommended that you buy 10 shares in a certain company, say, ABC Ltd. He tells you that the company has a good track record of paying regular dividend every year and the dividends are likely to grow at a rate of 4% per year on an average for the foreseeable future. The next dividend is expected to be $1.50 per share and the shares are selling in the secondary market for $28.50 per share. As per your financial plans and life profile, you feel that any risky investment like in shares of a company, should earn at least 9% per annum.

1. Compute the intrinsic value of the share (Intrinsic value of any financial instrument is the value that it should sell for in the market).

2. Will you buy these shares? Discuss your reasons briefly in no more than 50 100 words and support your reasoning with relevant computations.

3. What might cause a difference between a shares intrinsic value and its market price? (100 150 words)